This week’s report focuses on the UK general election, what uncertainty that causes and the risks around Brexit for investors. In addition, we publish updated Purchasing Manager Indices from the UK and Eurozone, as well as flag US job numbers. We also highlight three important, upcoming announcements for the week.
ONE MONTH TO GO
It’s a month to go before we’re in the polling booths to vote in the next UK Government, but only a few days since we marked ballot papers in local (and mayoral) elections. While the results were good, extrapolated into a general election scenario, the Tories only enjoy a 11 points lead over Labour versus the 17 point lead the polls are predicting. This would result in a majority of between 30 and 48 seats, better than May’s current 17, but much less than the 200 that some polls are predicating. This calculation could be flawed. The local election turn-out was relatively low and were mostly held in traditional Tory territory, but it could mean that May doesn’t get the strong Brexit mandate she’s demanding.
UK SURVEY STRONG
The latest UK Markit Purchasing Manager’s Index (PMI) showed a rapid rise in business activity since December 2016 as the published number hit 55.8 in April, up from the 55.0 in March. It marks the ninth month in a row that the number has been above the level of 50 and which shows that the economy is expanding. While the pace of input cost inflation persisted in April, prompting the steepest increase in prices charged by service sector firms since July 2008, these providers remain confident about their 2017 prospects for growth. This buoyancy is on the back of the new business growth already seen year-to-date and since the pace of expansion has returned to heights more in line with the summer of 2015 than since then.
EUROPEAN GROWTH UP
European PMI numbers put the level of growth in the Eurozone at a six year high for April, following a number for the month of 56.8, up from the 56.4 in March. This latest publication marked the 46th month in a row that activity in the region has expanded. Growth was recorded in output for manufacturers and service providers and both sectors see the outlook remaining bright. Rates of expansion were also broadly similar across the Eurozone’s biggest three economies: Germany, France and Italy
GOOD US JOB NUMBERS
Non farm payrolls in the US increased by 211,000 in April 2017, above the revised 79,000 for March and versus consensus market expectations of 185,000. The unemployment rate dropped even though the labour force participation rate edged lower to 62.9%. The employment-to-population ratio increased to 60.2 percent, its best showing of 2017 and its highest since February 2009. The strong numbers supported wages which increased 2.5% on an annualised basis.
7IM remains underweight UK assets, but our portfolios are overweight in terms of Sterling exposure due to 7IM’s ability to manage currencies. By way of an example, the 7IM Balanced Fund has 64.1% exposure to Sterling, but our allocation to UK equities is around just 10%. The portfolio positioning is designed to reduce investors’ reliance on the UK economy, and heightened currency risk around Brexit, while protecting portfolios against exchange rate risk.
International diversification and managing Sterling currency risk do not have to be the same thing. So given the current volatile political environment and its impact on the Pound, you want to own international assets, but hedge currency risks back to Sterling where possible, so that you only receive the foreign asset performance.
THREE ANNOUNCEMENTS DUE THIS WEEK
11 May – Bank of England Interest Rate Decision // 12 May – Eurozone Industrial Production // 12 May – US Inflation Rate
* REST OF FIELD
SOURCES: TELEGRAPH, BLOOMBERG, 7IM
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